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House Votes to End Subsidies to Student Loan Firms

By Nick Anderson
Washington Post Staff Writer
Friday, September 18, 2009

The Democratic-led House approved a bill Thursday that would overhaul college lending and spend tens of billions of dollars on student grants, community colleges, school construction and early childhood education.

The bill would end a program that subsidizes private lenders that provide federally guaranteed student loans. The government itself would make all such federal loans as of July 1, effectively cutting out banks and other lenders as middlemen. That would be a major shift because direct government lending in the last academic year accounted for about a quarter of federal loan volume.

Democrats have long sought to end the subsidized lending, and Republicans have fought to keep it. Democrats now have the upper hand because subsidies have become a ripe target in a time of public skepticism toward bankers. They say students would benefit from direct lending because the government offers a more reliable source of capital for loans at the same rates and terms as the guaranteed loan program.

Thursday's 253 to 171 vote, largely along party lines, moves the bill to the Senate. There, it faces more obstacles even though Democrats control the chamber, because senators sympathetic to the lending industry wield significant influence.

But the Obama administration is pushing hard for passage, in large part because the lending overhaul would free up an estimated $80 billion over 10 years for its education agenda.

Half that amount, or $40 billion, would flow to Pell grants under the House bill. Those are the main federal college scholarships for low- and moderate-income students. The maximum award would rise from $5,350 per student to $5,550 next year and eventually to $6,900 in 2019.The bill would index the grants to inflation starting in 2011.

Other spending provisions span a range of causes, from preschool to community college.

Republicans belittled the bill as a free-spending grab bag. "We can invest in students without crippling them with runaway entitlement spending," said Rep. Brett Guthrie (R-Ky.). He said the Republican alternative -- to keep the current lending system while studying reforms for a later date -- would avoid "a massive infliction of debt on future generations."

But Democrats easily defeated that proposal. "There's a huge difference between these two approaches on what to do," said Rep. Robert E. Andrews (D-N.J.). He rattled off goals the bill aims to accomplish: helping a returning veteran get a Pell grant in addition to GI benefits; easing the burden on community colleges, many of which are overwhelmed with new students; renovating schools where "they're taking classes in broom closets" and investing in reading and math programs for 4- and 5-year-olds.

Among other spending, the bill would provide:

-- $8 billion to help states improve a hodgepodge of early education programs from birth to kindergarten. The measure envisions a state grant competition akin to the new federal Race to the Top fund that is pushing states to reform public schools. In this case, the goal would be to raise the quality of child-care and preschool programs that often provide highly uneven educational results.

-- $10 billion for community colleges to renovate campuses, improve instruction and forge alliances with businesses and job-training programs.

-- $4 billion to modernize public schools over the next two years. Federal aid for school construction has long been a partisan flash point. Republicans say Washington has no business in school construction. Democrats say too many campuses are crumbling or outdated.

For students, the bill also would simplify paperwork. Many student advocates say the Free Application for Federal Student Aid is so cumbersome that it deters potentially eligible students from seeking Pell grants. The bill would streamline the much-maligned application form.

Four Democrats voted against the bill, and six Republicans voted for it. None of the 10 was from Maryland or Virginia. For Rep. Tom Petri (Wis.), one of the Republican mavericks, the vote was a milestone. He has advocated direct lending since 1983, a lonely position in his party.

"After years of explaining my approach," Petri said, "and years of defending direct loans from misleading attacks by the private student loan industry, we are an important step closer to settling the debate."

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